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Energy Transfer Partners ETP and Kinder Morgan Energy Partners KMP
Analyst Note 12-18-2008 | Jason Stevens
Kinder Morgan Energy Partners is breaking through the frozen capital markets this week by raising $500 million in new debt and roughly $200 mill ion in additional equity. The question on our minds is why Kinder is seeking to raise so much capital at relatively expensive rates: 9% for the 10-year senior notes and a cash yield of nearly 9% on the equity component. While Kinder's filing says the proceeds will be used to pay down outstanding borrowings on revolving credit lines and for general purposes, we wonder whether this is the full explanation. Kinder has a $250 million note maturing in February, but does not specifically need to raise cash to meet this obligation, in our view. We think Kinder is building a war chest to see it through potential tough times ahead.
In addition to Kinder, Energy Transfer Partners, Enterprise Products Partners EPD, Enbridge Energy Partners EEP, and TC Pipelines TCLP have either come to market with debt issuances or filed registration statements for new debt or equity offerings in the past two weeks. These master limited partnerships have fee-based cash flows and attractive growth projects, but none of them, in our opinion, explicitly need to raise additional capital at historically high rates. From a liquidity standpoint, they could use capacity on existing bank lines for most or all of 2009 capital needs. So why raise cash at 9%-10%? We suspect that these companies fear capital markets could get worse before they get better. This thinking would suggest that those that can access markets, do. Those that can't, we suppose, hope markets get better soon. Taking advantage of the current, and perhaps evanescent, thawing in debt and now equity markets shows the best sort of opportunism, in our view.
Given the recent market volatility and given that I have a majority of my investment portfolio in ETP; I have been a little concerned about the recent unit price decline and decided to get in contact with investor relations to see if I could get a better handle on the JV with OGE and the $600M debt offering.
They actually called me after I sent them an email requesting information on this debt offering and expressed my concerns over the over 9% rate. I also asked about the JV with OGE. It should be noted; I emailed at 8:30pm EST and got a call within 15 minutes. Talk about customer service... 5 STARS
Here is what I learned:
As suspected ETP does NOT have a cash flow problem, but given the potential for inflation and to hedge against possible higher interest rates if the credit markets once again over tighten, they decided to increase liquidity now and use some of that money to pay down revolving credit. This would effectively reduce the cost of the debt offering and build a reserve 'war chest' to fund future expansion.
With regard to the JV with OGE; ETP is moving forward to spite possible complications other parties may have. While they recognize the other parties may be having difficulties at the moment; not one of the parties involved is talking about terminating this JV.
The gas reserves in OK and the additional infrastructure are very exciting prospects. While ETP has not included the potential benefit in estimates for 2009 earnings I was told it has the potential to be very substantial.
While it is purely speculative on my part I was left with the impression that something is in the works which may provide a pleasant surprise to unit holders. But when pressed I was told that it could not be disclosed at this time.
I hope this helps clarify some of the recent news releases out there...
The undisclosed issue is the settlment of the Fed complaint on restraint of trade. EXpect an announcement in a week or less.
Disagree that ETP has no cash flow problem. If the credit markets do not open up they and everyone else in the US has a BIG problem. They borrowed $500M at 9% with a 3 year put. If interest rates spike they will need to refi in only 3 years. They and other MLPs also cannot sell additional equity at any reasonable cost. Too many sellers. To go borrow much additional money would require more equity too or they will need to pay more for debt and possibly lose their investment rating.
They borrowed the $600M to keep liquidity as you said but what is their cash burn right now. As they do a bit of processing that will be a significant drag on DCF. You are right on that the future is not clear - but there certainly are stormclouds out there.
The JV projects are a great idea but again ETP needs the credit markets to cooperate a bit. Jan 20th may give us a better idea of the future, but right now most of the JVs are dropping away due to credit costs.
THe new connections in OK as definately cost effective as you said and production to DCF now and in the future.
ETP is one of the stronger MLPs but it too has significant issues in this strange marketplace.
An important issue not mentioned in this thread but mentioned by Kelcy in the last CC is the substantial reduction in capital costs for the newly announce pipeline projects where materials had not yet been ordered or contracts let. The actual costs of completion will be far less that the costs in their budgeted projections. What available capital they do have will go much farther than the last several years.